EFG-Hermes faces own Arab spring

It has been a difficult 12 months for EFG-Hermes, the leading Middle East investment bank, which now finds itself in the teeth of a financial storm as the subject of an unwanted takeover battle.

The Cairo-based bank, founded in 1984, has seen its market value drop steeply since the turmoil of last year's uprising in Egypt. Its shares have lost more than a third of their value in the past year, giving it a market capitalisation of $850m.

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The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused. > A further shadow has been cast over the bank by its association with Gamal Mubarak, son of the ousted Egyptian president who owned a stake in its private equity business.

But the bank, whose largest shareholders are Dubai Financial Group with an 18.5 per cent stake and Abu Dhabi Financial Authority with 9.8 per cent, moved fast to deny any wrongdoing and express confidence in its co-CEOs.

Despite its recent troubles, analysts say EFG-Hermes is a well run business with extensive expertise in its region. They point to the battle for control of the bank as a sign of confidence in its future.

"It is a good franchise with a good team of people," says Aybek Islamov, analyst at HSBC. "EFG proved on many occasions that they were professional and able to lead deals and work alongside international banks and have equal expertise in the market. I don't see any overleveraging or any risky investments on its balance sheet."

< > EFG shareholders last week approved a joint venture deal with QInvest, in which the Qatar investment group would inject $250m in return for control of the bank. The deal would leave in EFG in sole control of its private equity arm and its 60 per cent stake in Credit Libanais, a Beirut-based lender.

But EFG has also been fighting off what may turn into Egypt's first ever hostile takeover bid.

Planet IB, a nascent buyout group backed by Arab and Egyptian investors, has announced a rival bid valuing the entire group at about $1bn and asked the regulator to allow it to carry out due diligence.

One its backers is thought to be Sheikh Tariq bin Faisal al-Qassimi, a relative of the ruler of Sharjah. Planet IB says it is also backed by Egyptian telecoms mogul Naguib Sawiris, but EFG insists he has dropped out.

"We think there is lot of merit to an agile, nimble, fast-moving investment bank in the Middle East market once activity has picked up in 18 to 36 months," says Ahmed El-Houssieny, Planet IB's chief executive.

Planet IB's offer has been dismissed as not serious by EFG. Independent analysts say its offer has lacked proof of availability of funds and information about the investors' identities.

< > But Mr El Houssieny, who says his bid is backed by private investors from Gulf countries including Abu Dhabi, Saudi Arabia and Bahrain, charges that EFG's management is wrong to "extinguish competition".

For QInvest, a Doha-based investment bank, the potential tie-up with EFG presents an opportunity to grow from a domestic to regional player.

"It's a marriage of convenience," says one Gulf banker. "The Qataris can yoke themselves on to the region's biggest investment bank, while EFG can expand in the Gulf and try to forget its Egyptian worries."

QInvest, part-owned by Qatar Islamic Bank, is chaired by Jassim bin Hamad al Thani, the son of the country's prime minister, an influential businessman who plays an important role in guiding the country's investment strategy.

"There has been a limit to its origination ability beyond its chairman," says the banker. "Linking up with EFG will broaden that ability." QInvest, which has hired a phalanx of well paid investment bankers, would benefit from the execution capabilities and record of EFG-Hermes, he adds.

< > EFG, meanwhile, has long sought to break into the Gulf from its Egyptian base, but bankers say its franchise has failed to flourish much beyond the UAE brokerage business.

The Cairo-based bank was formed out of the 1996 merger of the Egyptian Financial Group, which was founded in 1984, and Hermes, a company formed by two Wall Street-trained Egyptian bankers. Mr Heikal, one of the bank's current co-CEOs, is a Goldman Sachs veteran who worked in the earlier EFG.

"I think there will be immediate synergies," says Mr Islamov at HSBC. "QInvest is owned by Qatar Islamic Bank so there would be cross selling more into Qatar, and as a regional investment bank servicing high-net worth individuals, EFG could reach more high net worth people in Qatar."

Given the dearth of equity market and merger activity in the UAE, EFG can seek to expand through the Gulf via the rapidly growing Qatari market, and in tandem with QInvest's deep pockets.

"They are the biggest independent investment bank around, while we can bring in great Qatar contacts," says one executive aware of QInvest's thinking.